Investors Divest from China Shares Amidst Fresh Economic Recovery Efforts

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Despite Beijing's attempts to stimulate growth through increased borrowing for additional expenditures, investors have been rapidly divesting from Chinese stocks, resulting in a notable exodus from the world's second-largest economy.

According to Morgan Stanley strategists, there has been an unprecedented stage of foreign fund outflows from China's A-share market. A-shares refer to the yuan-denominated shares of mainland China firms traded on the Shanghai Stock Exchange and Shenzhen Stock Exchange. The total outflow through Stock Connect, a trading link that provides access to mainland China shares for international investors, reached $22.1 billion from August 7 to October 19. This is the highest outflow ever recorded in the platform's history.

The CSI 300 Index, which monitors the top 300 stocks on the Shanghai and Shenzhen stock exchanges, hit its lowest point since February 2019 on Monday. However, it experienced a slight recovery on Tuesday and Wednesday after the approval of 1 trillion yuan ($137 billion) in sovereign bonds by China's legislature and the purchasing of funds by the sovereign wealth fund to bolster struggling shares. Nonetheless, the index remains down by almost 10% this year, making it one of the poorest performers globally.

"It is crucial to have a reevaluation of China, " remarked Alex Capri, an esteemed research fellow at the Hinrich Foundation and a lecturer at the National University of Singapore Business School.

A Chinese clerk counts US dollar notes at a bank in Hai'an city in east China's Jiangsu province onAugust 6, 2019.

Xu jingbai/ICHPL Imaginechina/AP

"Chinas worsening economic conditions feed a larger, much more consequential phenomenon, which is a total collapse in trust in the Chinese Communist Party," he said.

This aerial photo taken on September 28, 2023 shows a housing complex by Chinese property developer Evergrande in Wuhan, in China's central Hubei province.

STR/AFP/Getty Images

China's economy will be hobbled for years by the real estate crisis

The primary factors

According to Brock Silvers, the chief investment officer at private equity firm Kaiyuan Capital, two main factors contribute to the declining interest in China shares: the country's economic slowdown and the lack of a convincing response from the authorities. Silvers highlights that the issues of real estate and debt crises are complex and do not have simple technological solutions, and the authorities appear hesitant to take the necessary actions.

Despite the officials announcing a series of support measures in recent months to bolster its economy, these remedies have not instilled confidence in investors. Moreover, Beijing's behavior towards foreign businesses, characterized as "increasingly opaque, arbitrary, and confrontational," has also unsettled them, according to Capri.

The imposition of anti-espionage legislation, police raids targeting multinational corporations, and the detention of foreign corporate employees, draw parallels to the Maoist era, conveying concerns amongst investors regarding China's increasing burdensomeness. Moreover, investor apprehension was exacerbated recently by an inquiry into Foxconn, a prominent Taiwanese company renowned for manufacturing Apple's iPhones.

Just weeks after the founder of one of China's largest private employers announced his candidacy for the next president of Taiwan, the case came to light. On Wednesday, a spokesperson for China's Taiwan Affairs Office informed reporters that the investigation was a "normal law enforcement action." George Magnus, an associate at the China Centre of Oxford University, stated that regardless of the motive, this probe exemplifies the ongoing trend of targeting and harassing foreign and local executives and employees.

"This is just fueling the erosion of confidence."

Rising tensions between China and US are also a key factor behind the exodus, experts said.

Global asset managers and venture capital firms are facing mounting scrutiny from the United States regarding their investment activities in China. President Joe Biden's executive order in August placed restrictions on US investments in China's advanced technology sectors.

Stimulus not working

In September, Chinas current and capital accounts experienced a significant outflow of $75 billion, as highlighted in a recent report by Goldman Sachs. This steep increase in capital exodus marked the largest net outflow since 2016 when the Peoples Bank of China (PBOC) unexpectedly devalued the yuan, leading to a sharp decline in the stock market.

The Beijing government has been making efforts to support the declining stock market. As part of these efforts, the National Peoples Congress has given approval for the issuance of new bonds in the fourth quarter, which will be used to assist in the rebuilding efforts after natural disasters.

Prior to this, Central Huijin Investment, a subsidiary of China's sovereign wealth fund, made an undisclosed purchase of exchange-traded funds and committed to further increasing its holdings in the future. This decision follows significant investments in banking shares made earlier this month.

In efforts to maintain sufficient liquidity, the People's Bank of China (PBOC) injected a historically high amount of cash into the banking system last week.

"Temporary measures, such as stock interventions or policy stimulus, do not alter sentiment. In fact, they only persuade individuals to seize the opportunity to leave before the intervention loses effectiveness," expressed Derek Scissors, a senior fellow at the American Enterprise Institute.

"The significant actions that would make a difference revolve around allowing more room for private sector growth by gradually diminishing the state's economic influence. However, it appears highly improbable under Xi."

Even Chinese investors seem to be plagued by a growing lack of faith in the future of Chinas economy.

Aerial view of the construction site of the Hainan Free Trade Port on April 4, 2023 in Haikou, Hainan Province of China.

Luo Yunfei/China News Service/VCG/Getty Images

China's attempts to restore confidence among entrepreneurs through unconventional methods have proven to be ineffective. One such example is when Shenzhen-based private equity investment fund, Dingtai Capital, surprised the market by urging its investors to redeem their shares due to the "unprecedented uncertainty" surrounding the economy.

"The upcoming major crisis distinguishes itself from the regional financial crises experienced in 1997 and 2008. Its impact on the economy will be extensive and indiscriminate," the fund conveyed in a widely shared letter to its investors.

Following the uproar caused by the letter, the fund released a statement on October 17, minimizing the significance of the message, referring to it as the perspective of "certain individuals" within the organization.

Craig Singleton, a senior fellow at the Foundation for Defense of Democracies specializing in China, noted that Chinese leader Xi Jinping has placed political considerations ahead of economic benefits. Singleton emphasized that while Xi holds significant power within China, he lacks the ability to coerce international investors into embracing his vision or jeopardizing their investments.